EXHIBIT 99.12
Unaudited pro forma condensed consolidated financial statements of IHHI
Acquisition - On March 8, 2005, Integrated Healthcare Holdings, Inc. ("IHHI")
completed its acquisition (the "Acquisition") of four Orange County, California
hospitals and associated real estate, including: (i) 282-bed Western Medical
Center--Santa Ana, CA; (ii) 188-bed Western Medical Center--Anaheim, CA; (iii)
178-bed Coastal Communities Hospital in Santa Ana, CA; and (iv) 114-bed Chapman
Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet
Healthcare Corporation ("Tenet"). The Hospitals were assigned to four
wholly-owned subsidiaries of IHHI (the "Subsidiaries") formed for the purpose of
completing the Hospital Acquisition. IHHI also acquired the following real
estate, leases and assets associated with the Hospitals: (i) a fee interest in
the Western Medical Center at 1001 North Tustin Avenue, Santa Ana, CA 92705, a
fee interest in the administration building at 1301 North Tustin Avenue, Santa
Ana, CA 92705, certain rights to acquire condominium suites located in the
medical office building at 999 North Tustin Avenue, Santa Ana, CA, and the
business known as the West Coast Breast Cancer Center; (ii) a fee interest in
the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA 92805; (iii)
a fee interest in the Coastal Communities Hospital at 2701 South Bristol Street,
Santa Ana, CA 92704, and a fee interest in the medical office building at 1901
North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center
at 2601 East Chapman Avenue, Orange, CA 92869, and a fee interest in the medical
office building at 2617 East Chapman Avenue, Orange, CA; and (v) the furniture,
fixtures and contract rights associated with the Hospitals.
Sale-Leaseback - Concurrent with the close on the Acquisition, Dr. Chaudhuri and
Dr. Shah exercised their option to purchase the real property of the Hospitals
(except for Chapman medical office building) pursuant to an Option agreement
dated September 28, 2004, as amended and restated on November 16, 2004 ("LLC
Option Agreement"). The option was exercised by the option holders purchasing
from IHHI all of the equity interests in PCHI, which holds title to the real
property. IHHI received $5 million and PCHI guaranteed IHHI's acquisition debt
of $50 million.
IHHI remains primarily liable under the $50 million acquisition note
notwithstanding its guarantee by PCHI, and this note is cross-collateralized by
substantially all of IHHI's assets and all of the real property of the
Hospitals. All of IHHI's operating activities are directly affected by the real
property that was sold to PCHI. Given these factors, it appears that IHHI has
indirectly guaranteed the indebtedness of PCHI. In substance, IHHI is standing
ready to perform on the acquisition debt should PCHI not be able to perform and
has undertaken a contingent obligation to make future payments if those
triggering events or conditions occur.
In connection with the sale of the real property of the Hospitals, IHHI entered
into a triple net lease with PCHI to leaseback this real property for an initial
term of 25 years. Per the triple net lease, PCHI will receive rent that covers
the cost of the underlying debt, plus a guaranteed spread up to 2.5%.
Additionally, IHHI has a right to renew the leases for periods up to an
additional 25 years.
PCHI is a related party entity that is affiliated with IHHI through common
ownership and control. It is owned 51% by West Coast Holdings, LLC (Dr. Shah and
investors) and 49% by Ganesha Realty, LLC (Dr. Chaudhuri and William Thomas).
Generally accepted accounting principles require that a company consolidate the
financial statements of any entity that cannot finance its activities without
additional subordinated financial support, and for which one company provides
the majority of that support through means other than ownership. Effective March
8, 2005, IHHI determined that it provided the majority of financial support to
PCHI through various sources including lease payments, remaining primarily
liable under the $50 million debt, and cross-collateralization of IHHI's
non-real estate assets to secure the $50 million debt. Accordingly, IHHI has
included in its consolidated financial statements, the net assets of PCHI, net
of consolidation adjustments.
Common Stock Warrants - IHHI entered into a Rescission, Restructuring and
Assignment Agreement with Dr. Chaudhuri and William Thomas on January 27, 2005.
Previously, IHHI had obtained financing from Dr. Chaudhuri and Mr. Thomas and
had issued to them a $500,000 secured convertible promissory note that was
convertible into approximately 88.8% of IHHI's issued and outstanding common
stock on a fully-diluted basis, a $10 million secured promissory note, and a
stock option agreement, all of which together with related accrued interest
payable pursuant to the terms of the notes were rescinded and cancelled.
Pursuant to the Recession, Restructuring and Assignment Agreement, IHHI released
its initial deposit of $10 million plus accrued interest on the Tenet Hospital
Acquisition back to Dr. Chaudhuri, issued non-convertible secured promissory
notes totaling $1,264,014 to Dr. Chaudhuri and Mr. Thomas, and issued warrants
to purchase up to 74,700,000 shares of IHHI's Common Stock (but not to exceed
24.9% of IHHI's Fully-Diluted capital stock) (the "Warrants"). Concurrent with
the close of the Acquisition, IHHI repaid the non-convertible secured promissory
notes of $1,264,014 to Dr. Chaudhuri and Mr. Thomas.
The Warrants are exercisable beginning January 27, 2007 and expire in 3.5 years
from the date of the issuance. The exercise price for the first 43 million
shares purchased under the Warrants is $0.003125 per share, and the exercise or
purchase price for the remaining 31.7 million shares is $0.078 per share if
exercised between January 27, 2007 and July 26, 2007, $0.11 per share if
exercised between July 27, 2007 and January 26, 2008, and $0.15 thereafter.
Based upon a valuation obtained by IHHI from an independent valuation firm, IHHI
has assigned a value to the 74,700,000 warrants of $27,987,100 at the date of
grant. As of March 31, 2005, IHHI has recognized an expense of $16,434,173
related to the issuance of the Warrants. IHHI computed the expense of the
Warrants based on the fair value of the Warrants at the date of grant and the
maximum number of shares exercisable as of March 31, 2005 of 41,291,892 (which
constitutes 24.9% of the fully diluted stock that would have been outstanding as
of March 31, 2005 assuming maximum possible exercise of the Warrants). IHHI has
recorded the fair value of the remaining unexercisable Warrants as of
$11,552,927 as deferred warrant expense. IHHI will recognize additional warrant
expense in subsequent quarters over the term of the Warrants of 3.5 years, based
on any future increase in the number of the Warrants that become exercisable.
The following Unaudited Pro Forma Condensed Consolidated Financial Information
of IHHI and its wholly-owned subsidiaries gives effect to the Acquisition, the
Sale-Leaseback, and the issuance of the Warrants transactions. The historical
financial information of IHHI set forth below has been derived from the
historical audited consolidated financial statements of IHHI included in its
annual report on From 10-K for the year ended December 31, 2004. The Unaudited
Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2004 includes
the pro forma adjustments giving effect to the Acquisition, Sale-Leaseback, and
issuance of the Warrants transactions as if they had occurred on that date. The
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 2004 include pro forma adjustments giving effect to the
Acquisition, Sale-Leaseback, and issuance of the Warrants transactions as if
they occurred as of January 1, 2004.
The Unaudited Pro Forma Condensed Consolidated Financial Information is provided
for informational purposes only and does not purport to present the consolidated
financial position or results of operations of IHHI had the Acquisition,
Sale-Leaseback, and issuance of the Warrants transactions occurred on the dates
specified, nor is it necessarily indicative of the consolidated financial
position or results of operations of IHHI that may be expected in the future.
The Unaudited Pro Forma Condensed Consolidated Financial Information should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and notes thereto included in IHHI's annual report on Form 10-K for the year
ended December 31, 2004 and its quarterly report on Form 10-Q for the quarter
ended March 31, 2005.
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INTEGRATED HEALTHCARE HOLDINGS, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 2004
Historical
Historical Tenet Pro forma Pro forma
ASSETS IHHI Hospitals (3) adjustments IHHI
------------- ------------- ------------- -------------
Current assets:
Cash and cash equivalents $ 69,454 $ 244,146 $ 1,359,412 (1) (7) $ 1,673,012
Accounts receivable, net -- 37,769,344 (37,769,344) --
Inventories of supplies, at cost 5,913,638 105,357 (1) (7) 6,018,995
Prepaid expenses and other assets 18,519 8,579,284 (6,118,410) (1) (7) 2,479,393
------------- ------------- ------------- -------------
87,973 52,506,412 (42,422,985) 10,171,400
Property and equipment, net 57,423 43,556,983 15,936,370 (1) (7) 59,550,776
Notes receivable from affiliate and other assets 3,398,701 (3,398,701) (7) --
Investment in hospital asset purchase 11,142,145 (11,142,145) (2) --
Deferred loan fees, net 44,970 6,623,718 (4,690,718) (5) (7) 1,977,970
------------- ------------- ------------- -------------
Total assets $ 11,332,511 $ 106,085,814 $ (45,718,179) $ 71,700,146
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of debt & capital leases $ 11,264,013 $ 204,141 $ 41,735,987 (1)(5)(7) $ 53,204,141
Income taxes payable -- 4,605,000 (9) 4,605,000
Accounts payable 156,142 21,430,493 (21,430,493) (7) 156,142
Accrued compensation and benefits 800,313 9,997,093 (9,997,093) (7) 800,313
Medical Claims incurred but not reported 3,748,369 (3,748,369) (7) --
Accrued restructuring costs 3,917,768 (3,917,768) (7) --
Other current liabilities -- 2,488,838 (2,488,838) (7) --
------------- ------------- ------------- -------------
Total current liabilities 12,220,468 41,786,702 4,758,426 58,765,596
Capital lease obligations, net -- 3,455,260 -- (1) 3,455,260
Due to affiliate -- 10,362,970 (10,362,970) (7) --
Minority interest in variable interest entity -- 5,000,000 (4) 5,000,000
Stockholders' equity:
Common stock 20,780 102,600 (1) 123,380
Common stock warrants -- 27,987,100 (8) 27,987,100
Additional paid in capital 1,189,621 9,997,400 (1) 11,187,021
Deferred warrant expense -- (11,552,927) (8) (11,552,927)
Accumulated (deficit) earnings (2,098,358) 50,480,882 (71,647,808) (1)(7)(9) (23,265,284)
------------- ------------- ------------- -------------
Total stockholders' equity (887,957) 50,480,882 (45,113,635) 4,479,290
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 11,332,511 $ 106,085,814 $ (45,718,179) $ 71,700,146
============= ============= ============= =============
See accompanying notes to unaudited pro forma condensed consolidated financial
information
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INTEGRATED HEALTHCARE HOLDINGS, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 2004
Historical
Historical Tenet Pro forma Pro forma
IHHI Hospitals (3) adjustments IHHI
------------- ------------- ------------- -------------
Net operating revenues $ -- $ 341,752,741 $ -- $ 341,752,741
Operating expenses:
Salaries and benefits 1,247,098 174,626,636 -- 175,873,734
Supplies 10,628 47,704,610 -- 47,715,238
Provision for doubtful accounts -- 42,038,130 -- 42,038,130
Other operating expenses 528,446 97,873,324 68,000 (4) 98,469,770
Depreciation and amortization 62,114 4,542,155 (1,007,542) (4)(7) 3,596,727
Common stock warrant expense 16,434,173 (8) 16,434,173
Restructuring charges -- 3,917,768 (3,917,768) (7) --
------------- ------------- ------------- -------------
1,848,286 370,702,623 11,576,863 384,127,772
Operating loss (1,848,286) (28,949,882) (11,576,863) (42,375,031)
Interest expense, net -- 404,814 7,981,686 (6)(7) 8,386,500
------------- ------------- ------------- -------------
Loss including minority interest and
before provision for income taxes (1,848,286) (29,354,696) (19,558,549) (50,761,531)
Provision (benefit) for income taxes -- (5,672,000) 5,672,000 (7) --
Minority interest -- -- (68,000) (4) (68,000)
------------- ------------- ------------- -------------
Net loss $ (1,848,286) $ (23,682,696) $ (25,162,549) $ (50,693,531)
============= ============= ============= =============
Basic loss per share $ (0.09) $ (0.41)
Diluted loss per share $ (0.09) $ (0.41)
Number of shares used in per share computation:
Basic 19,986,750 (10) 124,539,000
Diluted 19,986,750 (10) 124,539,000
See accompanying notes to unaudited pro forma condensed consolidated financial
information
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Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
Pro forma adjustments for the unaudited pro forma condensed consolidated
financial information are as follows:
(1) Reflects IHHI's completion of its acquisition on March 8, 2005 of
four Orange County, California hospitals and associated real estate
(the "Acquisition"), including: (i) 282-bed Western Medical
Center--Santa Ana, CA; (ii) 188-bed Western Medical Center--Anaheim,
CA; (iii) 178-bed Coastal Communities Hospital in Santa Ana, CA; and
(iv) 114-bed Chapman Medical Center in Orange, CA (collectively, the
"Hospitals") from Tenet Healthcare Corporation ("Tenet"). IHHI
financed the Acquisition through the issuance of debt of $53
million, the sale of 102,600,000 shares of IHHI's common stock for
proceeds of $10.1 million, proceeds of $5 million from the sale of
all of the real property of the acquired hospitals to PCHI, a
related party, and the assumption of capital lease obligations of
$3,659,401. IHHI's debt consists of two promissory notes that bear
interest at 14% and have terms of two years. The purchase price,
after all purchase price adjustments, of the Acquisition amounted to
$69,784,202. The fair value of the tangible assets acquired and
liabilities assumed consisted of the following:
Property and equipment $59,493,353
Inventories of supplies 6,018,995
Prepaid expenses and other current assets 2,338,854
Debt issuance costs 1,933,000
-----------
$69,784,202
===========
(2) Reflects the return of IHHI's $10 million initial deposit and
accrued interest to Dr. Chaudhuri and Dr. Chaudhuri's rescission and
cancellation of the $10 million secured promissory note with IHHI.
Reflects the repayment of the $1,264,013 of secured promissory notes
concurrent with the close of the Acquisition.
(3) Reflects the audited combined financial statements of the acquired
hospitals, Western Medical Center - Anaheim, Western Medical Center
- Santa Ana, Coastal Communities Hospital and Chapman Medical
Center, including certain other healthcare businesses related to the
operations of these hospitals (collectively, the "Tenet Hospitals")
as of December 31, 2004, and the related combined statements of
operations for the year ended December 31, 2004.
(4) Reflects the consolidation of PCHI and the classification of PCHI's
equity accounts as minority interest in variable interest entity.
IHHI's rent expense to the extent of debt servicing on the
underlying debt has been eliminated against PCHI's rental income.
Amounts payable by the Company to PCHI as rent expense that are in
excess of debt servicing on the underlying debt are accounted for as
an element of minority interest in variable interest entity expense
in the accompanying consolidated statement of operations.
Additionally, amounts assigned to land and buildings under lease
from PCHI are being depreciated and amortized over the 25 year
initial term of the lease.
(5) Reflects the deferred loan fees related to IHHI's issuance of $53
million in debt in connection with the Acquisition. IHHI has
accounted for the debt issuance costs as deferred loan fees and
amortized such fees over the two year term of the notes.
(6) Reflects interest expense on the $53 million of debt and
amortization of the deferred loan fees over the two year term of the
notes as if the Acquisition occurred on January 1, 2004.
(7) Reflects the elimination of the Hospital assets and liabilities not
acquired from Tenet in the Acquisition.
(8) The unaudited pro forma condensed consolidated balance sheet
reflects IHHI's issuance of 41,291,892 Warrants to purchase IHHI
common stock as if they were granted on January 1, 2004. The
unaudited pro froma condensed consolidated balance sheet also
reflects $16,434,173 of expense recognized upon issuance of the
Warrants. Remaining amounts of deferred warrant expense will be
recognized in future periods based on any increases in the number of
outstanding shares of the Company's fully diluted common stock.
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(9) The unaudited pro forma condensed consolidated balance sheet
reflects IHHI's provision for income taxes considering the
Acquisition, sale-leaseback, and the Warrant issuance transactions.
The sale-leaseback transaction resulted in a taxable gain of
approximately $11 million. IHHI recognized a full valuation
allowance of its deferred tax asset.
(10) Pro forma net loss per share is based upon the number of shares of
common stock outstanding after the Acquisition, sale-leaseback, and
the Warrant issuance transactions. The effect of the Warrants has
been excluded because their effect is anti-dilutive to the
calculation of pro forma net loss per share.
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